Equity markets finished last week in positive territory as risk sentiment was stoked by the very strong Non Farm Payrolls out of the US. This data was also supported by the ISM figures released later in the day on Friday, which improved for the month of January at 54.3 on better orders component. Similar improvements were also seen in the Eurozone, where business surveys and unemployment figures in Germany continue to show positive trends. In Europe, the Stoxx 50 was seen 3.2% (which was even better than the performance of the S&P 500 at 2.2%) and the MSCI World Index showed a rise of 2.0%.
Drilling down to individual sectors, services and electronics were the star performers with financials seeing some recovery off of its yearly lows after the European Central Bank’s Long-Term Refinancing Operation (LTRO) received positive press. The question going forward will be extent to which the lack of progress in Greece (with respect to the loss agreements that will be shouldered by private bondholders) can effect the latest rally in regional stock markets. At this stage, the LTRO is supporting the financial sector as it is seen as a protective measure against total default in Greek government debt. Earnings reports will be one of the primary focuses this week, with mining companies GlenCore and Xstrata being two of the bigger releases.
In currency markets, the Euro saw some losses overnight on a general concern over the situation in Greece. There is a possibility that we will see a final agreement on the ongoing debt swap discussions but even if this occurs, the focus will likely shift to the current disagreements over austerity measures and the difficulties in securing additional funding from the Troika.
Looking ahead this week, there are some significant event risks that could weigh on sentiment and create renewed volatility in the Euro. The ECB will conduct its next monetary policy meeting on Thursday, so their press conference following the interest rate decision will be scrutinized to assess the overall bias from the central bank. Macro data has been generally supportive in recent weeks (with the main story coming with the US payrolls showing that 243,000 jobs were created in January along with an unemployment dropping to 8.3%). This data will likely lead to upwardly revised GDP revisions for 2012 and limit the downside in equity markets for the next few weeks.
The latest rally in the EUR/USD is starting to look top heavy as prices have now formed a range with the downside levels now coming under pressure. A break here would be significant as it would put the MACD back into negative territory and show prices below the 100 and 200 period moving averages, with match nicely with historical support levels. We look for a downside break and then retracement as a suitable sell entry, targeting this years lows back below 1.30.
The S&P 500 is approaching some very critical resistance levels on the longer term charts so we will look at the shorter term charts to get an idea of whether or not we will see an upside break. The higher lows and upward cross in the 100 and 200 period moving averages turn the balance of the evidence into the bullish camp so we will look to buy dips into 1325 looking for a rise to new hourly highs.